What are sanctions, and are we in a new era of economic war? This week's Radio Davos

As opponents to Russia’s invasion of Ukraine seek to isolate Moscow, we ask an expert: what are sanctions, do they work, and how will the sanctions and Russia’s countermeasures change the geopolitical landscape?

Mikael Wigell, Research Director at the Finnish Institute of International Affairs and the author of, among many other publications, Geo-economics and Power Politics in the 21st Century, has plenty to say about the efficacy - or otherwise - of sanctions.

He gives his view on what we should look out for now - not least what China does - and what might be the unexpected consequences of what he calls a new Cold War.

Mikael Wigell, Research Director, Finnish Institute of International Affairs

Sanctions are essentially restrictions on economic flows. So we can think of capital flows, resource flows, trade flows, even data flows these days. And they have a strategic purpose, usually. So you apply sanctions in order to get the target state to do something that you would like it to do, or refrain from something.

Sanctions essentially work usually in kind of three stages.

First, you first you have a ‘threat’ stage, when you when you threaten somebody with sanctions –“Unless you do what I say, I will apply sanctions.” That's the first stage.

The second stage is then the limited use of sanctions, when you signal that you're serious - “I will do this.” And you apply certain sanctions on a target state.

And then the third stage is what we could call economic warfare. And then the strategic aim changes a bit because then it's [no longer] about trying to have the target state refrain from doing something, then it's all-out warfare, in the sense of trying to weaken the target state and weaken its economy and decouple it from other economic flows.

Mikael Wigell: The traditional sanctions are trade sanctions, where you restrict trade with a target state; or asset seizures; or there can be export controls – ‘you don't export to another state’. Sanctions can be applied on any economic flows really.

Lately we've also seen a lot of financial sanctions. Now when we look at how sanctions and what sanctions are applied in the world, we see that sanctions have become the central key means of economic and security policy.

So we've seen sanctions - the use and application of sanctions - heavily increasing throughout the last 20-30 years, accelerating use of sanctions, especially financial sanctions.

And it's especially the US and Europe that use financial sanctions because the US and Europe are very central in the financial architecture in the global economy. So they have the power to use - it's an efficient means for them to use - financial sanctions because finance is so central.

What we've seen lately also is that China, which hasn't applied sanctions before, is starting to use more and more sanctions. And there we talk about especially about trade sanctions because China is very central in world trade. China is not central in the financial world economy, so China doesn't, can't, use financial sanctions very effectively. But China can use trade sanctions effectively. It has a lot of effect when it does.

Robin Pomeroy: What kind of thing can China or does China do in that respect?

Mikael Wigell: China has been using trade sanctions and threatening increasing use of trade sanctions against Australia, for instance, in certain quarrels with Australia. Australia is quite dependent trade-wise on China - so that's an efficient means for China to use.

Or China has been using trade sanctions against the Baltic states - Lithuania especially lately because of Lithuania's recognition of the Taiwan embassy under the name Taiwan. So China applied sanctions, especially trade sanctions.

So I would see China using trade sanctions in a number of other cases as well, with some great effect because it really hurts when China does that, especially if the other country, the target state, is very dependent and has become very dependent on China and trade with China.

Robin Pomeroy: You said at the start there are these three levels when it comes to sanctions: the threat of sanctions, the imposition of sanctions, and then trade war. Are some sanctions themselves considered acts of war?

Mikael Wigell: Yes, I mean, Russia, for instance, right now considers some of the Western sanctions, the imposition of sanctions against Russia, acts of war. Russia speaks about ‘Western economic warfare’ right now.

And we've seen that also through history. Already back in Athens, consider the great Peloponnesian War back in antiquity. There were acts of sanctions that were considered acts of war because they cut through to the heart of the economy. If you put on a financial embargo or an economic embargo on a state which really can't then attend to its basic needs, those can well be considered acts of war.

Or we can think of the Cuban embargo. Cuba has considered certain sanctions by the US as acts of war because it really makes it very difficult for Cuba to attend to its basic needs of its population.

Robin Pomeroy: So how effective are sanctions? Looking back through historical cases, is it easy to identify times when they've worked or is it easier to identify when they've not worked?

Mikael Wigell: This is a great debate that has been going on for years and years amongst scholars - if sanctions work or not.

I think the better question to pose is is when do sanctions actually work, under what conditions do sanctions work?

And often we see that sanctions work when there are applied by a coalition of states, making it difficult for the target state to come around those sanctions. Or they often work better against democratic states than authoritarian states, because in authoritarian states the leaders don't necessarily need to attend to the needs of the population so much, or they don't need to care about public opinion as much as in democratic states. So they often work better against democratic states.

Of course, they work much better against a state which is very dependent on trade or whatever sanction is being applied. If you’re heavily export-oriented, trade-dependent and so-on and so-forth, then you're vulnerable, more vulnerable, to sanctions in that case.

What we see now in the case with Russia, for instance, is that the sanctions that have been applied against Russia following its aggression against Ukraine take a heavy, heavy toll on the Russian economy. The Russian economy is now almost completely decoupled from the global economy. We see increasing capital flight. We see GDP crashing down. We will see technological backwardness and so forth. So it takes a heavy toll on the Russian economy. So in that sense, sanctions have great potential for economic destruction.

Whether sanctions will work in actually changing any of the Russian goals and strategic behaviour, that's another question. And whether Putin will take steps back because of the sanctions, that's another matter.

But sanctions often also have so-called secondary goals and secondary aims. So part of this game now or this strategic logic with applying and implementing sanctions against Russia is also to signal to other states in the world system that if you're very aggressive, if you're behaving aggressively, this is the sort of consequences that you will suffer. So perhaps China, for instance, takes notice of the very effective way in which Western sanctions have been applied and the heavy economic toll it takes on the Russian economy to think twice before, for instance, invading Taiwan or something like that. So this has this signal - secondary signals, aims - as well with applying sanctions.

Robin Pomeroy: Are there any examples though where it's clear they have worked? So the aim, I suppose, of sanctions against Russia is to get Russia to pull out of Ukraine. Obviously, that's not happened yet as we speak. There have been sanctions, as you say, on Cuba, for example, aimed, I suppose, at regime change of some kind. That didn't seem to work. On Iran, something similar there - sanctions both international but also particularly from the United States. They might have inflicted a lot of damage - both of those cases - but they didn't actually reach the end that they were meant to be aimed for. Are there any examples where it's like, ‘Yep, we put in some sanctions, we got the result. Well done.’?

Mikael Wigell: I think in the case of Iran, sanctions actually worked pretty well. I think it persuaded Iran to the table, to the negotiating table. And the JCPOA deal was actually very much a result of sanctions. That deal was, of course, repelled by by Trump coming into the presidency, but that hadn’t to do with the sanctions. The sanctions actually worked very well in persuading Iran to negotiate.

On Cuba sanctions have certainly not worked. For 50 years they haven't worked.

When it comes to Russia, the invasion of Crimea, Russia's invasion of Crimea in 2014, when Europe and the US and a lot of other countries applied sanctions on Russia, I think they actually persuaded back then Russia not to go further, not to go for Mariupol, for instance, because clearly the regime, the Kremlin regime, was clearly surprised by the sanctions and the quite heavy sanctions already then. And it kind of led Russia to pull back a bit in that case.

So sanctions work and they don't work depending on the context and conditions.

What's important to remember is that sanctions often work before they are applied - in the threat stage. We have a lot of examples when threatening with sanctions - if you go through history there are cases of threatening of sanctions and then the other side pulls back and doesn't take the step it was taking because of threatening sanctions - before they have even applied.

Robin Pomeroy: What about the impact? You mentioned that sanctions work best when it's a coalition of countries getting together, imposing the sanctions together. If that doesn't happen and you get one country imposing sanctions, the risk is the other countries take up the slack - if there's a trade or something these other countries can come in. But I think over the years, there's been more of this case that if a certain part of the world - particularly the United States, but maybe, possibly also Europe - does act, a lot of other countries have to fall into line one way or another. Can you tell us how that works, whether it's legally, or due to reputational issues, that one country can make other countries fall into line with the sanctions it imposes?

Mikael Wigell: On one hand, this has to do with the ‘extra-territorial’ effects of, especially, financial sanctions, sometimes called secondary sanctions. So if the U.S. puts sanctions on, let's say, Chinese banks, they don't apply only to U.S. citizens. U.S. corporations doing business with that Chinese bank. They will also apply to any other company doing business with that Chinese bank. So they have a lot of effects beyond only the US-China relationship. Others will also be hit with sanctions if they do business with that Chinese company or a bank in that case, which spreads the effects very much.

And this has to do with the fact that the U.S. is so central in the financial architecture in the world economy, but also the dollar – [it’s a] very dollar-centric world economy. So the U.S. can effectively decouple any country or company from the dollar economy. And that's a big threat for anybody in the world economy, not being able to access U.S. dollars.

So that's a bit why these sanctions and special financial sanctions have these very broad extraterritorial effects and why they can be quite effective even though the U.S. wouldn't get together a broad coalition of other countries behind its sanctions, the U.S. can actually do that on its own quite effectively.

Robin Pomeroy: So what about the future? You say in the last few decades, sanctions have been more and more a popular tool for certain parts of the world to use. Where do you see things going now? And the Ukraine crisis – is it a kind of a test case? Is it going to change the way people see the way sanctions are working? What do you see happening in the next months and years?

Mikael Wigell: Some of the trends that we see now accelerating have been there already for some time. So I think first of all we have had this trend of what I call the ‘weaponization’ of the global economy for some time already. And what I mean by the weaponization of the economy is really that economic flows are more and more being used as strategic means [in] foreign and security policy. And that's why we see the use of sanctions have accelerated so much during recent years.

The other trend that's been already there is what I call the ‘securitisation’ of the economy. So since financial sanctions and trade sanctions are used so much these days, states need to react to that and protect themselves more and more from becoming a target of sanctions. So they're starting to look at their vulnerabilities to sanctions very much. And that creates a sort of hedging behaviour in the world economy and also protectionism to some extent, because you don't want to be so dependent on others, because you can become a target then of sanctions.

We've seen, for instance, China and Russia trying to develop these sort of alternative financial structures. An alternative to the SWIFT system, for instance, the CIPS system is the Chinese variant of that. Or China coming up with alternatives to the IMF or the World Bank. Or China coming up with a different sort of investment and loans mechanism and trying to push the renminbi, the Chinese currency, to become more of a key currency in world trade, so that China wouldn't be so dependent on U.S. systems because China is worried that it would then become a target.

So that's a securitisation trend that has been going on there for some time.

The last trend I would take up is what I call the ‘balkanisation’ of the world economy. We see globalisation going back somewhat. This started already before COVID-19, but very much accelerated with COVID-19 when when we had shocks to global value and supply chains and we started to see reshoring of supply chains. So a sort of carving up, disintegration, of the world economy to some extent.

We also see accelerating competition for technical standards - who sets the standards in the global economy. And we might see the disintegration somewhat of these technical standards that really have been the basis for globalisation.

So these three major trends in the world economy: weaponization, the securitisation, the balkanisation of the world economy have been there for some time. They're accelerating very much now with this crisis and this war that we have going on in Russia and Ukraine.

The big question really now is what choice will China make in relation to Russia. That will be key for going forward because now it's clear that the West is and will be for some time in a new, sort of new Cold War with Russia. Russia will be decoupled completely from Western economic networks. What it's not clear is whether China will provide economic shelter to Russia or not.

If China provides economic shelter to Russia, then this sort of new [cold] war goes global. Then we essentially end up in a situation where we have Russia and China and some other countries dependent on them economically on one side, and then we have the sort of democratic world on the other side.

But if China refrains from sheltering Russia economically and politically and takes a more neutral position, then we might have a more restrained and manageable new Cold War, which would only be with Russia and so forth. An we might actually have some possibilities of co-operating with China, going forward.

Robin Pomeroy: I suppose there's in any case, whether a massive move like you're talking about there, or just whenever it comes to sanctions, there must be this cost-benefit analysis going on because sanctions will hurt the target, but almost always so many of those sanctions also hurt the country that is imposing the sanctions, or it's hurting certain constituents within that. If that’s people doing trade or in finance or whatever. These are questions that the policymakers have to think long and hard about. Is that right?

Mikael Wigell: Absolutely. There will be a great global economic toll of these sanctions now as well, because they're so broad and extensive, the sanctions being put on Russia right now. So they will certainly hurt Europe and the broader global economy as well.

So I think it can be useful to divide those effects into Russian response effects because Russia will, of course, respond to these sanctions now as well, and that will have an economic toll. And then we will have spill-over and systemic effects of this economic warfare going on, or speeding up, accelerating between Russia and the West.

So in terms of the Russian response effects, I think first of all, foreign portfolio investment is being locked up now in Russia. You can't get the investment out. You will see broad asset seizures, nationalisations going forward in Russia.

And then we'll have the Russian counter-sanctions, when it comes to export restrictions. So we already know that fertiliser exports are hitting global food production quite badly. We can expect certain restrictions on energy exports by Russia. We have Russia being quite central in critical mineral exports, and we can expect restrictions on certain critical minerals. And that will hit, for instance, car, aerospace, semiconductor manufacturers, and especially it will hit European technology production - 3D-printing, robotics. There are certain critical minerals that you need to produce these sorts of new technology, and those are to some extent dependent on minerals mined in Russia.

And then we have other minerals, for instance, Russia is the third-biggest supplier of nickel, which is used in electronic vehicle batteries and stainless steel. And here, of course, it's good to remember that now when these exports are being restricted, probably being restricted, by Russia, the other big country controlling these sorts of exports is China. China controls very much the similar sort of mineral supply bottlenecks, which it can then use to amplify its own supply dominance.

This is really a threat to the EU’s, especially Europe's, ability to deliver its green transformation and its digital transformation to some extent.

And then, of course, we have other spill-over effects that we're starting to see now because of these sanctions and counter-sanctions. We have some turmoil already in the international commodities markets - price increases in oil, gas, wheat, metals, fertilisers, gold. We probably will be starting to see a bit of shortages of grain, certain metals and gas going forward. We have accelerating inflation globally. We have probably increased poverty in developing countries because especially the shortages of grain and energy, certainly inflation in the commodities market, will hit poor countries quite badly.

And we’ll probably see a bit of reduced growth in Europe because Europe, except France, is heavily trade-reliant and has a very export-oriented growth model, so it's quite ill-suited to prolong trade-reducing sanctions.

And as a consequence of all this we will see very much, I think, increased state intervention in the economy, especially in Europe, which of course changes to some extent the economic picture in Europe especially.

So there's a lot of broader effects of this sanctions warfare going on between Russia and, especially, Europe.

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